GCC Central Banks Follow US Fed in Rate Cuts

Following the recent decision by the US Federal Reserve to lower its benchmark interest rate by 50 basis points, GCC central banks have implemented similar cuts. This alignment, prompted by the Fed’s move to support economic stability and achieve a 2 percent inflation target, is likely the start of a series of reductions that may extend into 2025. Central banks in the UAE, Saudi Arabia, Qatar, Bahrain, and Kuwait have adjusted their rates to maintain monetary stability and support economic growth.

Responses from GCC central banks

UAE
The Central Bank of the UAE (CBUAE) cut its Overnight Deposit Facility (ODF) rate by 50 basis points, reducing it from 5.40 percent to 4.90 percent. This measure aims to influence the cost of borrowing and deposits, while the rate for short-term liquidity borrowing remains 50 basis points above the base rate.

Saudi Arabia
The Saudi Central Bank lowered its repo rate by 50 basis points to 5.50 percent and the reverse repo rate to 5 percent. This adjustment is intended to ease borrowing costs, stimulating economic activity in a challenging global environment.

Qatar
Qatar’s central bank took a more aggressive approach, cutting key interest rates by 55 basis points. The lending rate was reduced to 5.70 percent, the deposit rate to 5.20 percent, and the repo rate to 5.45 percent. This move aims to manage liquidity and support economic stability.

Bahrain
The Central Bank of Bahrain (CBB) also decreased its overnight deposit rate by 50 basis points, bringing it down to 5.50 percent. The CBB stated this was necessary to maintain financial stability amid global market fluctuations.

Kuwait
Kuwait’s Central Bank made a smaller cut, lowering the discount rate by 25 basis points to 4 percent. This decision reflects the country’s declining inflation rate, which has dropped from 4.71 percent in April 2022 to 3 percent in July 2024. The move is expected to support economic growth and ensure price stability.

Regional implications

The coordinated rate cuts by GCC central banks highlight their close ties with US monetary policy, especially given the dollar-pegged currencies in most Gulf states. Aligning with the Fed helps maintain exchange rate stability and prevent capital outflows. Lower borrowing costs are expected to encourage investment and consumer spending, providing a boost to non-oil sectors, crucial for the region’s diversification efforts.

However, there are potential downsides. Reduced rates could compress banking sector margins, impacting profitability, particularly as global economic conditions remain uncertain. The overall effect on the economy will depend on how well these measures can balance growth stimulation against inflationary pressures.

Market reactions

Following the Fed’s announcement, US stocks rallied, and the dollar fell to a one-year low, signaling investor optimism. In the GCC, similar market reactions could be expected, with potential boosts to equities as lower rates benefit corporate earnings. The gold market also reacted positively, reaching a new high of US$2,591.19 per ounce, driven by the dollar’s decline and increased demand for safe-haven assets. This trend could impact sectors like jewelry and luxury goods, particularly in the UAE.

Outlook

The GCC’s economic trajectory will be closely linked to the Fed’s rate policy and global economic trends. As more rate cuts are anticipated, GCC countries will need to navigate the fine line between supporting economic growth and managing inflation. Strategic fiscal policies and continued diversification efforts will be essential for sustaining growth and financial stability in the region.

• Previous Article Oman’s Strategic Move to Attract Foreign Investment: Exploring the New Opportunities
• Next Article Egypt Introduces Business-Friendly Tax Relief Measures to Boost Economic Growth